Chapter 1

Introduction to
Operations
Management

McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 1: Learning Objectives
You should be able to:
1. Define the term operations management
2. Identify the three major functional areas of
organizations and describe how they interrelate
3. Identify similarities and differences between
production and service operations
4. Describe the operations function and the nature of
the operations manager’s job
5. Summarize the two major aspects of process
management
6. Explain the key aspects of operations management
decision making
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Operations Management
What is operations?
 The part of a business organization that is responsible
for producing goods or services
How can we define operations management?
 The management of systems or processes that create
goods and/or provide services
The operations function consists of all the
activities directly related to producing goods
or providing services
Operations Management affects:
 Companies’ ability to compete
 Nation’s ability to compete internationally

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Good or Service?

Goods are physical items that include raw materials,

parts, subassemblies, and final products.
• Automobile
• Computer
• Oven
• Shampoo

Services are activities that provide some combination

of time, location, form or psychological value.
• Air travel
• Education
• Haircut
• Legal counsel

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 Supply Chain

Supply Chain: A sequence of activities and

organizations involved in producing and delivering
a good or service

Suppliers’ Direct Final

Suppliers’ Direct Producer Distributor Final
suppliers suppliers Producer Distributor Customers
suppliers suppliers Customers

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Supply Chain for Bread

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Basic Functions of the Business
Organization

Finance
Sales HRM

OM
QA
Marketing

MIS Accounting
Engineering

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Basic Functions of the Business
Organization

Organization
Organization

Marketing
Marketing Operations
Operations Finance
Finance

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The Transformation Process

Value-Added

Inputs Transformation/ Outputs

Inputs
• Land Transformation/ Outputs
• Goods
Conversion
• •Land
Labor Conversion • •Goods
Services
• Labor Process • Services
• Capital Process
• •Capital
Information
• Information

Measurement
and Feedback
Measurement Measurement
and Feedback and Feedback
Control
Control

Feedback = measurements taken at various points in the transformation

process
Control = The comparison of feedback against previously
established standards to determine if corrective action is needed.
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 Food Processor (Goods)
Table 1.2
Inputs Processing Outputs

Raw Vegetables Cleaning Canned

Metal Sheets Making cans vegetables
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment

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 Hospital Process (Service)
Table 1.2

Inputs Processing Outputs

Doctors, nurses Examination Healthy
Hospital Surgery patients
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy

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Goods-service Continuum

Products are typically neither purely service- or purely goods-

based.
Goods Services
Goods Services
Surgery, Teaching
Surgery, Teaching
Songwriting, Software Development
Songwriting, Software Development
Computer Repair, Restaurant Meal
Computer Repair, Restaurant Meal
Home Remodeling, Retail Sales
Home Remodeling, Retail Sales
Automobile Assembly, Steelmaking
Automobile Assembly, Steelmaking

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Manufacturing vs. Service?

Manufacturing and Service Organizations differ chiefly

Manufacturing and Service Organizations differ chiefly
because manufacturing is goods-oriented and service is act-
because manufacturing is goods-oriented and service is act-
oriented.
oriented.

Goods Services
Goods Services

Tangible Act-Oriented

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 Manufacturing vs. Service

Goods Service
Degree of customer contact Low High
Uniformity of input High Low
Labor content of jobs Low High
Uniformity of output High Low
Measurement of productivity Easy Difficult
Production and delivery Different time Same time
Quality assurance Easy Difficult
Amount of inventory Large Small
Evaluation of work Easy Difficult
Ability to patent design Usually Not usually
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Managing Services is Challenging
1. Jobs in services are often less structured than in
manufacturing
2. Customer contact is generally much higher in services
compared to manufacturing
3. In many services, worker skill levels are low compared to
those of manufacturing employees
4. Services are adding many new workers in low-skill, entry-
level positions
5. Employee turnover is high in services, especially in low-skill
jobs
6. Input variability tends to be higher in many service
environments than in manufacturing
7. Service performance can be adversely affected by many
factors outside of the manager’s control (e.g., employee and
customer attitudes)
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Scope of Operations Management
The scope of operations management ranges
The scope of operations management ranges
across the organization.
across the organization.

The operations function includes many interrelated

activities such as:
 Forecasting
 Capacity planning
 Facilities and layout
 Scheduling
 Managing inventories
 Assuring quality
 Motivating employees
 Deciding where to locate facilities
 And more . . .
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Role of the Operations Manager

The Operations Function consists of all activities

directly related to producing goods or providing
services.

A primary function of the operations manager is

to guide the system by decision making.
 System Design Decisions
 System Operation Decisions

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 System Design Decisions
• System Design
• These are typically strategic decisions that:
• usually require long-term commitment of resources
• determine parameters of system operation
– Capacity
– Facility location
– Facility layout
– Product and service planning
– Acquisition and placement of equipment

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 System Operation Decisions
• System Operation
• These are generally tactical and operational decisions:
– Management of personnel
– Inventory management and control
– Scheduling
– Project management
– Quality assurance

• Operations managers spend more time on system operation

decision than any other decision area
• They still have a vital stake in system design
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Why Study OM?

Every aspect of business affects or is affected by

operations.
Many service jobs are closely related to
operations:
 Financial services
 Marketing services
 Accounting services
 Information services

There is a significant amount of interaction and

collaboration amongst the functional areas.
It provides an excellent vehicle for understanding
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Decision Making
Most operations decisions involve many
alternatives that can have quite different
impacts on costs or profits.
Typical operations decisions include:
 What: What resources are needed, and in what amounts?
 When: When will each resource be needed? When

should the work be scheduled? When should materials

and other supplies be ordered?
 Where: Where will the work be done?
 How: How will he product or service be designed? How

will the work be done? How will resources be allocated?

 Who: Who will do the work?
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General Approach to Decision Making

Modeling is a key tool used by all decision

makers.
 Model: An abstraction of reality; a simplification of
something.

 Common features of models:

They are simplifications of real-life phenomena
They omit unimportant details of the real-life systems
they mimic so that attention can be focused on the
most important aspects of the real-life system

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 Models
Types of Models:
Physical Models
Look like their real-life counterparts
Schematic Models
Look less like their real-life counterparts than
physical models
Mathematical Models
Do not look at all like their real-life counterparts

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Benefits of Models
1. Models are generally easier to use and less expensive
than dealing with the real system.
2. Require users to organize and sometimes quantify
information.
3. Increase understanding of the problem.
4. Enable managers to analyze “What if?” questions.
5. Serve as a consistent tool for evaluation and provide
a standardized format for analyzing a problem.
6. Enable users to bring the power of mathematics to
bear on a problem.
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Limitations of Models

1. Quantitative information may be emphasized

at the expense of qualitative information
2. Models may be incorrectly applied and the
results misinterpreted
3. The use of models does not guarantee good
decisions.

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Quantitative Methods
A decision making approach that
frequently seeks to obtain a mathematically
optimal solution.
Linear programming
Queuing techniques
Inventory models
Project models
Forecasting techniques
Statistical models

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 Systems Approach
System - a set of interrelated parts that must
work together
 The business organization is a system composed of
subsystems
marketing subsystem
operations subsystem
finance subsystem
The systems approach
 Emphasizes interrelationships among subsystems
 Main theme: the whole is greater than the sum of its parts
 The output and objectives of the organization take
precedence over those of any one subsystem
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Key Issues for Operations Managers
Today

Economic conditions
Innovating
Quality problems
Risk management
Competing in a global economy

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 Environmental Concerns
Sustainability
Using resources in ways that do not harm
ecological systems that support human existence
Sustainability measures often go beyond traditional
environmental and economic measures to include
measures that incorporate social criteria in decision
making
All areas of business will be affected.
 Product and service design
 Consumer education programs
 Disaster preparation and response
 Supply chain waste management
 Outsourcing decisions

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Ethical Issues in Operations

Ethical issues arise in many aspects

of operations management:

* Financial statements * Worker safety

* Product safety * Quality

* The environment * The community

* Hiring and firing workers * Closing facilities

* Workers rights
END
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